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Tuesday, May 1, 2012

Hollande, Sarkozy, LTRO's, and Eurozone Distress : 2 articles

1. Courtesy of James Bond ( I kid you not ) writing for the Carnegie Endowment, on 'French Elections And The Eurozone: Between A Rock And A Hard Place', the copious excerpts below:

Both of France’s presidential candidates headed to the May 6 runoff election—front-runner Fran├žois Hollande and the current president Nicolas Sarkozy—have proposed ways to bring down France’s high budget deficits. But they have sidestepped the deeper and more fundamental challenges of restoring the country’s competitiveness and igniting growth.

In this election, neither of the candidates is telling the French public that their much-loved system of state intervention and labor protections cannot continue in its current form—no matter how true that may be. To put a finer point on it, they are not telling the electorate that the system, made possible by three decades of post–Second World War high growth, is now being financed at the margin by public borrowing.

The current system is unsustainable. Ever since the euro was created, France’s government spending has exceeded revenue (see Figure 1). The country’s current sovereign debt stands at 89 percent of GDP—not (yet) disastrous. But it is troubling enough that in January 2012 Standard and Poor’s decided to downgrade France’s government debt from AAA to AA+, a reaction to the country’s persistent budget deficit and feeble response to the eurozone crisis.

Both candidates recognize that France’s budget deficit must be brought down and would like to increase the government’s total take to solve the deficit problem. But their approaches reflect the differences in their political outlooks...

But the candidates are not discussing France’s real structural issues. First, for over ten years, France has not had robust economic growth. Second, public spending now accounts for 57 percent of GDP (see Figure 2); even before the current crisis, it stood at over 50 percent. Third, France, as one of the most highly taxed countries in the world, has limited potential for further fiscal mobilization. Fourth and most important, France’s firms and workers are no longer competitive compared to their peers, in particular Germany.

Historically, the policy choices of the two countries could not be more different. Germany, reeling from Weimar Republic hyperinflation, built its postwar growth on a strong deutsche mark. Internal adjustments in the labor market, control of the wage bill, and prudent macroeconomic and public expenditure policy led to productivity gains; reunification in 1990 bolstered the internal-adjustment mind-set. Since the creation of the eurozone a decade ago, European Central Bank monetary policy has been closer to that of the Bundesbank than of the Banque de France, so Germany’s 2002 adaptation to the eurozone and the strong euro did not constitute a break with former policy direction.

France, by contrast, had always exercised looser monetary policy than Germany. Before the introduction of the euro, France was able to contain labor costs without major internal adjustment and labor market reform by the selective and controlled devaluation of the franc relative to the deutsche mark. For France, adopting the euro meant completely breaking with the past. And France has not yet made that adjustment.

France cannot ignore the need to make profound internal reforms. As long as the country shares a common currency with Germany, it will not regain competitiveness without reforming its labor market and reducing its public spending. And reform it must. Without structural changes it will not grow, and without growth it will not be able to contain its debt.

Regardless of who wins these elections, the eurozone is facing two possible futures. The first is more optimistic: The new French president sets in motion the profound structural reforms his country needs...

The second future is far bleaker. If France does not reform, it will drag down the entire eurozone.

2.  According to Katchum, a financial blogger, 'The European Central Bank's LTRO Isn't Working Out: Protect Yourself With Gold And Silver'. [What's an LTRO ? The European Central Bank's Long Term Refinancing Operation] :

On Zerohedge, the article of the ECB deposit facility sparked my attention. Apparently, banks are depositing their money into the ECB at an alarming rate (Chart 1). Since the crisis of 2008, this deposit facility had risen a lot (250 billion euro), but has only recently skyrocketed to more than 800 billion euro.

This deposit facility at the ECB is a macro-economic indicator of market tension residing at the European banks. It is seen as a "safe haven" during economic turmoil in Europe. The higher this ECB deposit facility rises, the more banks favor the safety of the ECB deposit over higher returns in the interbank market. It shows that banks aren't lending to each other, and also shows that appetite for European government bonds is declining.

Even though banks borrowed 489 billion euro (LTRO I) and 529.5 billion euro (LTRO II) in loans (at 1% lending rate) from the ECB, a lot of that money just went back into the ECB deposit facility at 0.25%. This means that banks are actually opting to lose money due to fear of a eurozone break-up and government defaults.

The overall conclusion of this is that banks aren't buying government bonds and aren't lending to each other. Monetary velocity on the interbank market is slowing down. The lending measures (LTRO I, LTRO II) of the ECB aren't working out very much. This trend can be experienced by the rising government bond yields across Europe as investors anticipate huge losses in government bonds. The advice I can give is, prepare yourself for the worst in Europe, especially if you are a European citizen. In a worst case scenario, we will experience bank failures and possibly even government bankruptcy. The only protection you can have against this is to have precious metals in your portfolio...

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